Deciding to apply for a home loan is a big step, and if you’re self-employed, gaining approval from a lender is an extra hurdle, regardless of your income.
Loan approval for the self-employed isn’t impossible though, if often just means a little more research and a few more obstacles to overcome. In addition, if you’re self-employed, you might not have access to the usual paperwork required for a home loan application.
The good news is, it is still possible to achieve a successful home loan application if you’re self-employed.
Here we’ve compiled some helpful tips to assist those who are self-employed and considering applying for a home loan.
For self-employed applicants, it’s highly likely you have an accountant who is skilled at reducing your taxable income. Unfortunately though, this isn’t so helpful when you want to apply for a loan.
If your taxable income doesn’t appear sufficient on paper, lenders will be cautious when it comes to lending. Banks and other lenders have certain rules to follow and criteria to meet, so they need to be sure you are able to meet necessary requirements and manage repayments.
As well as showing your taxable income to a potential lender, you need to show ‘serviceability,’ which is the cash you have left once you deduct your expenses.
When you apply for a loan, it’s important to try and demonstrate a history of low expenses and higher income. Your mortgage broker and accountant can help you with this.
As with a typical loan, lenders like to see some sort of history of savings to show you live within your means and are serious about a home loan.
A reasonable deposit, as well as proof of savings history will come into play when applying for your home loan.
How Much to Borrow
As a self-employed professional, it’s important to be aware of your earnings in order to gain approval for a loan.
It’s beneficial to work out what your taxable income level needs to be, and how much you can afford to borrow. You can gain a practical idea of how much you can borrow with advice from your accountant, mortgage broker, or one of the many online loan borrowing calculators available.
Proof of Income
As a self-employed professional without regular payslips, you need to demonstrate to your potential lender that your income is consistent and as you say it is. Lenders need to be assured your business can maintain a relatively consistent, steady income.
Lenders will usually request personal tax returns for the past two years of self-employed applicants, and the expert advice of a professional accountant and mortgage broker is extremely beneficial in presenting your business’ income to a potential lender. It’s pertinent to keep your mortgage broker and accountant updated with the ins and outs of your business. Not being honest initially with a potential lender can be detrimental to your home loan application and chances of approval.
Try to always keep your tax returns up-to-date to show your most recent income. It’s also beneficial to not owe any tax when applying for a loan, as this may be checked.
As well as tax returns, potential lenders may also request BAS statements where applicable, and possibly a declaration from your accountant.
Engage a Mortgage Broker
A professional mortgage broker will be experienced in getting complex loans approved, including loans for individuals who are self-employed.
Your mortgage broker understands home loan lending requirements and has professional relationships with a range of banks and lenders.
A professional mortgage broker will help you devise a plan best suited to buying a property. Their professional know-how will help demonstrate how to boost your serviceability and achieve loan approval.
Do Your Research
Typically, a bank’s only option for a self-employed home loan is what’s known as a low documentation (low doc) loan.
Although a low doc loan can be a credible option, don’t be fooled into believing it’s your ONLY option! There are other home loan choices for self-employed individuals available.
Although many banks and lenders may encourage a low doc loan, it’s important to do your research, as well as speaking to your accountant and mortgage broker, to determine what other options are available for you. Low doc loans typically:
- Have a higher interest rate
- Are cheaper and easier for banks to process.
If you can provide the necessary paperwork as a self-employed applicant, you should be able to avoid a low doc loan and the higher interest rate that comes with this type of loan.
Your mortgage broker will have a good insight into which lenders are more likely to lend to those who are self-employed.
Your mortgage broker can help you access a home loan tailored to self-employed individuals, with lenders who are flexible and understand fluctuating incomes common to the self-employed.
Remember, being self-employed doesn’t mean you can’t be successful applying for a home loan.
Putting in the extra work, having the correct documentation, doing your research, being prepared, and engaging a professional accountant and mortgage broker will increase your chances of having your home loan application approved as a self-employed professional.